Forecast: Employee Plus One Health Coverage Over $10K

U.S. employers will see an increase in their medical benefit expenditures of 7 percent in 2010, creating significant affordability challenges for employers and employees, according to an analysis by consultancy Towers Perrin. The study findings show that many employers are preparing to take action by embracing new approaches to benefit management that could transform the current model of health care delivery.

In 2010, average annual spending on health care for a typical employee with one covered spouse/partner or dependent will cross the $10,000 mark, according to Tower Perrin’s annual Health Care Cost Survey, which draws on data provided by approximately 300 of the largest employers in the U.S. And while employers will continue to fund 78 percent of that amount, the actual dollar burden on employees will continue to grow because of the increasing cost base and the impact of benefit design-related increases in out-of-pocket costs, such as higher co-payments (view Exhibit 1).

Analyzing the 2010 data by coverage level, the average reported cost of medical coverage is $5,124 annually ($427 per month) for active employee-only coverage, $10,500 annually ($875 per month) for employee-plus-one spouse/partner or dependent coverage, and $15,084 annually ($1,257 per month) for family coverage (view Exhibit 2).

Annual employee premium contributions, on average, will rise by 10 percent, or by just over $200, during 2010—a bigger jump than the 8 percent increase seen in 2009, according to the study.

“Employees are feeling the impact more keenly given that these actions come at a time when wages at some organizations are flat or declining, 401(k) balances and employer matches are down, and other aspects of total rewards such as bonuses and profit sharing are being scaled back,” says Dave Guilmette, managing director of the Towers Perrin health and welfare practice.

As in years past, survey results show that employers continue to shoulder most of the burden. However, despite continuing employer support, the affordability gap for employees continues to grow as wages lag significantly behind health care cost increases (view Exhibit 3).

Health Care Reform Looms Large

“Given that employer health care costs have increased approximately 150 percent over the last decade, it’s not surprising that companies are nervous about reform efforts with the potential to increase costs [on employers] even further,” says Guilmette. “Furthermore, our reform survey showed that very few companies—a mere 11 percent—were willing to absorb higher health care costs by accepting reduced profits. For many of them, any reform-related cost increases would result in benefit cuts—and higher costs for employees and even customers.”

Another potential impact of health care reform could be further increases in the adoption of account-based consumer-directed health (CDH) plans, such as high-deductible plans linked to tax-favored health savings accounts (HSAs) or health reimbursement arrangements (HRAs). Employer adoption of CDH plans has risen significantly from 2004 to 2009, from 20 percent to 60 percent of surveyed companies, says Guilmette, “as employers recognize and embrace the value of these plans in controlling their health care costs and reducing the employee affordability gap.”

Moreover, one of the most controversial provisions of reform proposed by the Senate Finance Committee is an excise tax that would apply, beginning in 2013, to health programs with combined coverages (medical, dental, vision, flexible spending accounts, etc.) valued at more than $8,000 per year for individuals and $21,000 for families. Although these caps sound high, more than 50 percent of companies will hit the caps within the next three years if current cost trends continue, and the impact of the caps will increase over time, even with indexing on the tax thresholds after 2013, according to Towers Perrin.

“Because [CDH] plans have lower actuarial value than traditional health plans, they could help employers delay hitting excise tax cap limits by up to two years,” Guilmette says, because “the lower cost of these plans would likely hold family benefit values below the proposed $21,000 excise tax cap.”

According to Towers Perrin, annual premium costs for account-based CDH plans are $8,927 per employee (averaging together those with and without covered dependents), which is 13 percent less than the average traditional plan. And, unused account funds roll forward to defray future out-of-pocket costs.

‘High Performers’ Reap Financial Advantage

The Towers Perrin study found a wide variance in the growth of health care costs among U.S. companies, with significantly lower cost increases at organizations categorized as “high performers,” defined as those that meet their health benefit objectives in key areas that include controlling employer and employee costs; enhancing efficient purchasing of health care services; enhancing employee satisfaction with, understanding of and involvement in health benefit programs; supporting employees’ good health and addressing health risks/current health problems. According to the study, among companies that have adopted account-based CDH plans:

Altogether, high performers are paying 16 percent less—roughly $1,800 less per employee—for their health benefit programs. This cost differential means that a high-performing organization with 10,000 enrolled employees would spend, on average, $18 million less annually than a low-performing competitor, according to the study.

“This cost differential is very real and has a significant impact on a company’s ability to compete, especially in today’s market,” says Guilmette. “What’s more, the impact of the cost differential extends beyond company expenses and revenue to employees, widening the affordability gap. Employees at low-performing companies will pay nearly 20 percent more for their health care in 2010.”

The survey revealed some other important characteristics that differentiate high from low performers, which point to trends that all employers are expected to begin adopting to keep their costs down while continuing to deliver health care value:

• 76 percent of high performers—vs. 50 percent of low performers—say they use measurement disciplines to build action plans for performance improvement.

With the growing recognition that health management programs can slow and even reduce chronic disease, the data show employers adopting a range of changes aimed at influencing employee behavior and decision making, including:

• Employee incentives.According to survey data, high-performing employers will, over the next few years, expand their use of incentives to engage employees in health and wellness initiatives, such as health risk assessments, wellness programs and biometric screenings.

• Behavioral economics. Employers are beginning to leverage the potential behavioral economics holds to improve consumer decisions about health and health care, with 15 percent of high performers using this innovative decision design model and 48 percent expecting to do so by 2012. Also expected to grow are related programs that promote good decisions and offer convenience as an incentive, including on-site biometric screening, promotion of healthy foods and access to retail clinics.

• Personalized health management and care delivery. Just as doctors are taking steps to personalize treatments to individual needs and preferences to improve outcomes, employers are moving toward segmenting their employee populations and using a broad range of personalized approaches to influence employee behavior and decision making.

New directions in customization include:

• Using social networking to impact employee health and well-being. This personalized form of communication and influence is being used by 7 percent of high performers today, a group expected to more than quadruple in size by 2012. Employers are using blogs as a communication and connection tool, with use expected to grow significantly.

• Personalizing care delivery for better outcomes, including return to work. Examples include use of a health advocate to manage a chronic condition or serious illness, lifestyle coaching and integration of disability with medical care management.

• Leveraging technology innovations to improve health and engage consumers. New applications include personal health records—with use among high performers expected to double over the next few years, from 31 percent to 60 percent. High performers in increasing numbers expect to adopt remote biometric monitoring as a way to involve employees in managing their health and improve the quality of their care.

• Evolving measurement disciplines.What employers are measuring offers insight into what they value, and the survey shows that they are increasingly defining the success of their health benefit programs in terms of the impact they have on workforce well-being and productivity and the overall health of the employee population. For example, high-performing companies expect to focus increasingly on employee health status and risk, gaps in care through continuing review of medical claims, and employee perceptions of well-being in the workplace.

• Provider incentives for employers. Provider incentives and penalties encourage employers to adopt health care practices with the potential to improve outcomes and reduce costs. And while employers’ use of provider incentives is happening first at the margins, the data suggest that employers increasingly will be receptive to this approach, with current use expected to triple over the next few years.

“While large employers continue to work on health care demand through employee behavior change, they realize they can’t truly impact the underlying cost drivers without also addressing supply,” says Guilmette. “But few employers today can take on the provider payment model. They are instead waiting for government to take the lead and, when it does, they will be quick to follow.”

The Towers Perrin 2010 Health Care Cost Survey was conducted during August and September 2009.

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